Reciprocity, World Prices, and Welfare

We examine in detail the circumstances under which reciprocity, as defined in Bagwell and Staiger (1999), leads to fixed world prices. We show that a change of tariffs satisfying reciprocity does not necessarily imply constant world prices in a world of many goods and countries. While it is possible to find tariff reforms that are consistent with both reciprocity and constant world prices (as Bagwell and Staiger, 1999, argue), these reforms do not follow from the reciprocity condition, but rather from the requirement of unchanged world prices. More importantly, however, we show that even if these reforms keep world prices unchanged, they do not necessarily raise welfare in a multi-good, multi-country model. We propose an alternative reciprocity rule that performs better on this account. JEL Codes: F02, F13, F15.